2023-09-13 06:21:04 ET
Summary
- Markel Group is a global insurance company with a strong competitive advantage in the specialty insurance industry.
- The company's strategic growth initiatives, including expanding into high-growth markets and focusing on environmental, social, and governance commitments, position it for long-term growth.
- Markel has a solid balance sheet, with minimal debt risk and strong repayment ability, making it financially flexible to execute its growth initiatives.
- Given the company’s solid upside potential, backed by a strong competitive advantage and strategic expansion initiatives, I am bullish on MKL stock and recommend it to potential investors.
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Investment Thesis
Even though shares of Markel Group (MKL) have grown by more than 24% in the last year and more than 185% in the last decade, the stock is still cheap with a double-digit upside potential. I believe this impressive performance has been made possible by a number of factors, which also make me bullish on the company for the long term because these factors are long-term growth levers.
These factors include the company's competitive advantage, which stems from its diversified portfolio. Further, the company's strategic growth initiatives, which focus on expanding its presence in high-growth markets , will be, in my view, a major growth lever in the long run. Above all, the company's financial health, anchored on a very strong balance sheet, in my view, offers the company a very strong financial footing to execute its mandate and growth initiatives.
Company Profile
Markel Group Inc. is a specialist insurance firm that serves specialized markets worldwide with property and liability insurance, reinsurance, and investment management services. The company operates through three main segments with the following revenue distribution.
Market Screener
The insurance segment offers specialty insurance products and programs for various risks, such as professional liability, marine and energy, environmental, general liability, workers' compensation, and personal lines. The Reinsurance segment provides treaty and facultative reinsurance solutions for property, casualty, life, and health risks. The Markel Ventures segment invests in and operates businesses that are not related to insurance or reinsurance, such as manufacturing, consumer, business services, and healthcare.
Competitive Advantage
With its diverse product offering, global distribution network, outstanding claims handling , investment experience, and corporate culture, MKL has a significant competitive advantage in the specialty insurance industry, in my view.
The company has a proven track record of successful underwriting performance throughout a wide range of market cycles and geographic regions, as evidenced by its combined ratio of 92% for 2022 FY, up from 90% in 2021 FY. The organization also provides a plethora of specialist insurance products and programs , each tailored to the individual requirements and preferences of a certain market or industry . I will highlight some attributes that set MKL apart from its competitors.
Markel Specialty: This division of Markel Group offers specialty insurance products and services to a variety of specialist industries, including professional liability, marine and energy, environmental, general liability, workers' compensation, and personal lines. I believe Markel Specialty distinguishes itself from its competition by providing tailored solutions that address its customers' individual demands and preferences across a wide range of categories and industries. Specifically, its peers, i.e., UniFirst (UNF) and W. R. Berkley (WRB), have no product matching this unique MKL offering.
To support my assertion, I'll point out the company's Equine Insurance , which protects horses and horse-related activities, including breeding, racing, and riding. This product is one-of-a-kind in several ways. For instance, it offers a wide range of coverage options and customized solutions for various types of horses and horse-related activities such as mortality, medical, surgical, liability, transit, and event cancellation.
Before introducing this insurance, there existed a market need for a comprehensive and dependable insurance provider capable of meeting the unique and diverse needs of the equine industry. MKL's comprehensive and personalized product bridged the gap. Despite this unique offering, I believe the organization has potential for improvement. MKL, for example, can strengthen its online and digital presence. The company can improve its website and mobile app to provide customers with more information, features, and convenience. For example, the corporation might provide online quotations, applications, payments, claims, and renewals for its equine insurance products. The company can also use social media platforms to communicate with current and potential customers and raise brand awareness and reputation.
Given this background on how diverse and distinct MKL is compared to competitors, I am confident that this competitive advantage positions the company leg up in beating the competition and maximizing the opportunities arising from the distinct markets that it serves.
The company operates in more than 18 countries and territories and has a global reach because of its network of more than 2,000 agents and brokers, who give it access to its diverse geographical footprint. In addition, the company uses its investment expertise to achieve high returns on its investment portfolio , which includes fixed-income securities, equity securities, and Markel Ventures businesses. In my opinion, this geographical diversity is very crucial to the company's financial growth and stability for the following reasons:
Access to a large and diverse customer base: This helps the company to generate stable and diversified revenue streams. This is owing to the fact that different economies operate differently as a result of a variety of factors, such as political stability. As a result, flourishing economies mitigate the effects of slumping economies. For instance, the war in Ukraine slowed down economic growth; the effects of that can be mitigated by taking advantage of the quickest-growing economy in Guyana, growing at a rate of about 26%.
Helps in mitigating risks: It lessens the impact that potential threats like natural disasters, pandemics, economic downturns, regulatory changes, and political instability could have on the business. The corporation can even out its losses and gains and lower its concentration risk by spreading its investments across multiple regions.
Provides room for growth: The corporation can grow and innovate by entering untapped markets, forming strategic alliances with local businesses, or experimenting with novel approaches to doing business. This aids the firm in attracting new customers, expanding its customer base, and strengthening its position in the market. A good example is the company's entry into the Middle East and North Africa, as discussed in the succeeding section.
Further, the organization has a corporate culture that values integrity, creativity, teamwork, and a customer-focused approach. I am drawn to the company's corporate culture since it provides perks that help a company's growth. A healthy corporate culture, for example, contributes to consumer loyalty. Customers who believe the company appreciates their business and is dedicated to offering a better experience are more inclined to prefer the company over its competitors. Finally, a strong business culture encourages innovation and creativity, which I strongly believe are key pillars to growth and beating competition.
Strategic Growth Initiatives
MKL's compelling growth strategy includes expanding into high-growth markets like the Middle East and North Africa and differentiation across all segments, increasing market share and penetration in existing and new markets, pursuing strategic acquisitions that complement its portfolio and geographic footprint, and delivering on its environmental, social, and governance [ESG] commitments.
Markel Asia has lately expanded its operations into the MENA region, with marine and energy as two key sectors for future development. These are massive industries in the MENA region, and governments there have been providing incentives and funding state-funded infrastructure development to attract private investment.
MENA countries have made significant investments in massive maritime infrastructure, including ports/terminals, marinas, and shipyards, particularly in the marine industry. This has included Jebel Ali Port in recent years, which is currently the largest commercial port in the Middle East and one of the busiest ports in the world. In recent years, the port has witnessed significant investment, including the construction of a new container terminal, which raised its yearly capacity to 22.4 million TEUs. In addition, Abu Dhabi's Khalifa Port, Oman's Port Salah, and Saudi Arabia's King Abdullah Port have all been upgraded to enhance TEU capacity.
MKL is keen to offer local assistance to the sector and its partners as the influx of investment continues. Its marine insurance products are competitively priced . Their pricing strategy includes some discounts based on the following clauses.
With this aggressive price strategy, I am convinced that this company can gain a sizable market share in these emerging markets. This will increase sales and bottom lines, benefiting the company's financial health and share growth.
Generally, the global insurance company has a bright outlook, further serving as a major growth catalyst for MKL. Between 2022 and 2027, the property and casualty insurance market is expected to increase at an 8.5% CAGR . The market is expected to grow by $676.06 million. The market's growth is influenced by a number of reasons, including an increase in unpredictable catastrophic occurrences, the digitalization of the insurance business, and increased government requirements on obligatory insurance coverage.
Technavio
MKL, in my opinion, is better positioned to capitalize on this expanding market due to its competitive advantage, financial strength, and competitive pricing. Due to the company's diversity, these factors will earn them a sizable market share and a diverse revenue source. Furthermore, its customer-centric company culture, in my opinion, will translate to better levels of customer satisfaction and loyalty. I believe these provide the organization with a solid foundation for future growth.
Solid Balance Sheet
MKL has a healthy balance sheet, which gives it the financial flexibility to carry out its growth goals. Currently, the company has a total debt of $3.81 billion, which is way below the company's market cap of $19.34 billion. Further, with a cash and cash equivalent of $6.34 billion, it is apparent that the company's current liquidity position can fully pay off its outstanding debt, indicating that it has very minimal or relatively no debt risk.
In terms of interest coverage, its EBITDA of $3.29 billion covers its interest expenses of $193 million, more than 17x an indication of the company's solid repayment ability. Since debt can't be paid off by accounting profits, it is important to evaluate the company's cash flow ability to repay its debt. With that in mind, MKL has a decent cash flow from operations of $2.80 billion, which covers its outstanding debt by more than 73%, which is very impressive, in my opinion.
In addition to the impressive cash position, the company's liquidity is complemented by its enticing current ratio of 2.7, which assures its short-term solvency. Given these parameters, MKL has a solid balance sheet, which is critical for long-term success. It speaks volumes on its financial health and gives it much financial flexibility to execute its growth initiatives.
Valuation
Based on relative valuation metrics, MKL appears to be fairly valued at the moment, with a P/E GAAP ratio of 10.43 on a TTM basis, slightly above the industry median of 9.43; the company is trading at a fair value judging from this perspective. However, based on the solid company fundamentals, I estimated its intrinsic value using an EPS-based model. I used the EPS-based DCF model because there is a strong correlation between share prices and EPS. In my model, I assumed a five-year EPS growth rate of 15%, a discount rate of 7%, and a terminal growth rate of 5%. Below is the output of my model.
I settled for a 15% growth, which falls between the company's EPS historical growth rate of 11% and this year's projected growth rate of 16%; further, guided by the industry's growth, I expect the EPS to grow faster than it has been historically. For the discount rate, I used the company's WACC, which I arrived at using the formula WACC = E / (E + D) * Re + D / (E + D) * Rd * (1 - T), where;
E=market value of equity
D=market value of debt
Re=cost of equity
Rd=cost of debt
T=effective tax rate
Below are the computations using the given formula.
Given these assumptions, below is the output of my model.
According to my model output, the company has a fair value of $2,040.54, which translates to an upside potential of 40%. These results point to a bullish trend further reaffirmed by a DCF model by Alpha Spread, which estimates an upside potential of 63%. The disparity in my model and that of Alpha Spread could be the assumptions because, in my case, I used conservative assumptions, especially on the growth rate.
Based on these results, the company appears to be trading below its intrinsic value with a double-digit upside potential, which is a good opportunity for potential investors to leverage.
Risks
Although investing in MKL has the potential to be a lucrative and satisfying experience, there are risks involved that you should be aware of and ready to face. Some of the potential risks include:
Concentration in specialty insurance: MKL focuses primarily on specialized insurance lines such as niche markets and unique risks. While specialization might provide the potential for increased profits and growth, it also carries certain risks. One concern is that the success and profitability of the company are strongly reliant on the performance of these specialty insurance lines. Factors affecting those particular markets, such as regulatory changes, swings in industry patterns, or disruptions specific to specific industries, may have a greater influence on Markel than on other insurance companies with a larger product offering.
Investment risk: MKL invests in fixed income, equity, and Markel Ventures, accounting for about 18% of the company revenues. The investment portfolio faces credit, interest rate, market, liquidity, currency, and operational risks. Defaults, downgrades, volatility, illiquidity, exchange rate changes, and business failures may cause investment portfolio losses or impairments. These variables may hurt its investment income and finances, especially considering the significant percentage the segment contributes to the company's revenue basket.
Although I am bullish on this stock based on the information presented above, my bullish stance would turn to bearish should these risks or any other unforeseen uncertainty face this company, causing the strong upside trajectory of the stock to revert to a downside trajectory without any concrete turnaround strategies.
Investment Decision
MKL is a specialty insurance firm with long-term growth potential. The company has a significant competitive edge in the industry, a compelling growth strategy, a sound financial foundation, and an appealing valuation. The company is well-positioned to provide long-term value to its shareholders. As a result, I recommend it to potential investors.
For further details see:
Markel Group: A Specialty Insurance Company With A Long-Term Growth Potential